Domestic Delivery Segment Remains Key To UPS’s Profits In A Difficult Global Environment

by Trefis Team
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Upside
115
Market
126
Trefis
UPS
UPS
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United Parcel Service (NYSE:UPS) is a logistics company that derives its revenue from global delivery services. With a network that spans globally, it covers 99% of the locations worldwide. Per Trefis estimates, UPS shares have a fair value of $126, which is roughly 20% higher than the market price. You will find details about our forecast in our interactive dashboard for UPS. You can modify key drivers and visualize the impact of changes in these drivers on UPS’s price estimate. Additionally, you can access more Trefis Industrials data here.

Summarizing Changes In UPS’s Revenue Streams In Q1 2019, And Our Expectations For Full Year

  • Domestic delivery: Domestic delivery, which remains the mainstay of the company’s business model, reported revenues of $10.5 (up from $10.2 billion a year ago). The 3% improvement year-on-year was driven by increased e-commerce sales, which led to an increase in the number of deliveries for the company. Going forward, we expect this segment to continue to drive growth for UPS.
  • International package delivery: International delivery of packages is the second largest source of revenue for the company. For the first quarter, the company saw these revenues remain at the $3.5 billion figure seen in the previous quarter. However, we expect revenue growth for this segment to pick up in the coming quarters.
  • Freight and supply chain: UPS’s freight and supply chain revenues came in at $3.2 billion (down from $3.5 billion a year ago). We believe that this decline is largely due to the higher cost of UPS’s freight service compared to its competitors. But given the increased wage pressure, competitors will very likely be forced to increase prices in the near future – making UPS’s prices competitive again. This should help these revenues trend higher over the second half of 2019.

Total revenues for the company came in at $17.2 billion (slightly above the $17.1 billion in Q1’18). We expect the figure for full-year 2019 to be $74.5 billion.

UPS’s Margins Are Under Pressure, But Should Normalize Soon

UPS reported a notable increase in operational costs for the first quarter – something that can be attributed to higher wages for the period. Given tight labor market conditions and an overall dearth in the number of personnel available, wages in the logistics and freight industry have outpaced inflation over recent years. This has resulted in higher costs for logistics companies – a trend that is expected to continue over the foreseeable future.

UPS moved to remedy the impact of this on its bottom line by increasing the cost of its services, but competitors are yet to follow suit. While this hurt UPS’s revenues in Q1 and weighed on margins further, the margin figure should normalize over coming months as competitors also implement similar hikes.

Other Trends We Expect For Full-Year 2019

  • We expect that with the continuous growth of e-commerce sales, UPS should be able to leverage its position as the leader in processing and shipping of e-commerce goods to drive growth in its domestic market sales.
  • On the other hand, international sales may continue to lag due to poor global demand and trade wars. A slowdown in EU and China – two key markets for the company – will hurt international revenues.
  • The freight market may see a slowdown as U.S. economic growth slows. This may result in fewer freight deliveries. At the same time, we expect UPS to improve its freight and supply chain business as competitors’ prices are increased in line with wage-inflation.

We forecast that UPS’s EPS for full-year 2019 will be $7.46. Taken together with a forward P/E multiple of 16.9, this points to a $126 estimate for the company’s shares – about 20% higher than the current market price.

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